It’s not uncommon for home buyers to talk with several mortgage brokers or lenders to compare loan products and interest rates. One buyer who shopped around was scolded by a mortgage broker when he found out she was talking to more than one broker. He told her that she was ruining her credit score by allowing multiple credit inquiries.
Too many credit inquiries can negatively affect your credit score, but you can control the damage. And, credit inquires make up a relatively small part of your credit score.
For example, the FICO credit score from Fair Isaac Corp. that is widely used by mortgage companies for qualifying borrowers uses five types of information to calculate a credit score. Each type counts as a percentage of the total credit score. They are: payment history (35 percent); amounts owed (30 percent); length of credit history (15 percent); new credit (10 percent); and types of credit in use (10 percent). Credit inquiries fall into the “new credit” category, which accounts for less than 10 percent of your credit score.
Only voluntary inquiries are taken into account, such as the inquiries made at your request when you shop loan rates. Loan agents usually need to know your credit score before they can quote you an interest rate.
The FICO credit-scoring model ignores all mortgage inquiries made within the last 30 days, so they will have no impact on your credit score. An older version of the scoring formula uses a 14-day time span. A newer version uses 45 days. The lender decides which version of the scoring model it wants to use.
There’s no need to panic if you don’t line up your mortgage in 30 days. The scoring formula looks for mortgage inquiries older than 30 days. It counts all the mortgage inquiries within a certain period, which varies depending on the scoring model used, as one inquiry. For some borrowers, one inquiry might not affect their credit score at all. If it did, it should be less than five points off your score.
Let’s say you talked to four lenders during a week in May. You authorized each to check your credit. Then you postponed buying until August, when you shopped rates again within 30 days prior to closing the sale. The most recent credit inquiries wouldn’t affect your credit score. The four that were made in May would count as one inquiry.
HOUSE HUNTING TIP: Interest rates moved up about 0.25 percent during the week of June 9, 2008. And, there’s a wide range of rates being quoted. This is a time when it could pay off to shop carefully for the best rate and mortgage product to suit your needs.
For example, on June 16, one mortgage broker quoted 6.75 percent on a conforming loan (to $417,000) for a 5-year, interest-only, adjustable-rate mortgage (ARM) with no points. (One point — a loan origination fee — is equal to 1 percent of the mortgage amount). Another broker offered a 5-year ARM that is fixed for the first five years at 5 7/8 percent with no points. And, this rate was available for loan amounts up to $650,000.
Nonconforming jumbo financing for mortgage amounts over $1 million is still high — in the 8 to 9 percent range. Some buyers are achieving a lower blended rate by combining a conforming jumbo (to $729,750) with a second loan. Borrowers who have good credit and an established banking relationship with a lender might be able to arrange a preferential rate.
Before you authorize a credit check, find out what kinds of mortgage products a lender offers and provide a brief summary of your financial situation. Try to focus your rate shopping within a 30-day time period.
THE CLOSING: Don’t authorize a credit check until you’ve narrowed your search down to likely prospects.